Wednesday, November 7, 2012

GMXR is expected to issue to the Committed Holders an aggregate of $30.0 million principal amount of new first-lien senior secured notes due 2017, the proceeds of which will be approximately $27.1 million and will be used to retire the outstanding balance of the Company's 5.00% Convertible Senior Notes due in February 2013;

GMXR is also expected to issue shares of its common stock to the Committed Holders equal to approximately 7.4% of its currently outstanding shares of common stock to the investors at a price of $0.48 per share; and

At the closing of the transactions, GMXR will issue to the Committed Holders as consideration for the commitment restricted shares of common stock (for $0.01 per share) equal to approximately 12.5% of its currently outstanding shares of common stock. GMXR will pay a customary commitment fee in connection with this financing.

OK, so: they are borrowing $30 million in new first lien debt and getting $27.1 million of proceeds; exactly enough to pay off the 2013 notes. The new note is going to have an 11% cash or 15% (!) pay-in-kind (new notes) coupon!

Then, they are going to issue ~5.9mm common shares for 48 cents/share and ~10mm
common shares for a penny/share, for a total of 15.9 million new shares at an average cost of
18 cents/share!

What does this tell you? The company was willing to sell a HUGE stake for 18 cents a share - if it meant that they could borrow enough money at 15% PIK interest to get them through the next maturity.

How should the bond and stock prices react to this? The 2013 notes should trade up and the stock should trade way down. The 2013 notes now have a source for repayment which relieves a lot of worry there. Meanwhile, first lien investors are demanding double digit interest rates, and the company was willing to sell shares for 18 cents. That supports our view that the equity is worthless, since they took this deal.

In conclusion, the 2013 notes should now trade probably about 10 points higher, i.e. high 90s. The stock should fall to where this huge block is going to be sold - 18 cents per share. That's 62.5% lower than yesterday's price!

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